Posco and Nippon Steel Strengthen Defenses BUSINESS ASIA By Bloomberg

By Sungwoo Park and Dave McCombs

Posco and Nippon Steel formed a joint venture to recycle iron products, broadening the companies’ alliance to try and fend off rivals such as ArcelorMittal.

The two will invest about $140 million to build two furnaces in South Korea, Posco said in a regulatory filing. Posco, the third- biggest steel maker in Asia by output, will own 70 percent and Nippon Steel, the second largest mill in the world, will own the balance, the filing said. Posco’s initial investment will be 27.3 billion won, or $29.8 million.

Asian mills are cementing alliances to hinder hostile bids, and Posco and Nippon Steel own stock in each other. Lee Ku Taek, the chief executive officer of Posco, has said that the mill needs to increase its value to avoid becoming a target.

“Beside profitability of the business, the alliance itself is meaningful and is a good move for both companies especially considering that global steel makers are getting bigger,” Lee Won Jae, a steel analyst with SK Securities, said in Seoul.

Posco shares, which have more than doubled in the past year, fell 16,000 won, or 2.7 percent, to 588,000 won at 12:57 p.m. in Seoul on Monday as the benchmark Kospi index declined 3.2 percent. Nippon Steel, based in Tokyo, fell as much as 5.3 percent to 756 yen, and traded at 769 yen.

Mittal Steel bought Arcelor to form the biggest producer in the world, now known as ArcelorMittal, which pours about three times as much steel as its nearest rival. Tata Steel of India acquired Corus this year for $12 billion.

“After the emergence of mega-steel makers like ArcelorMittal and fast-growing Chinese steel companies, Posco and Nippon Steel expect the joint venture to expand the strategic alliance between them,” the two companies said.

The joint venture will build two so-called rotary-hearth furnaces, one in Pohang, South Korea, where Posco is based, and the second in Gwangyang, Posco said. The plants will each have a capacity of 200,000 metric tons and will process iron byproducts.

Posco and Nippon Steel said in October last year that they will spend more than $900 million to increase their stakes in each other. Nippon Steel will buy 2 percent of Posco to bring its stake to 5.32 percent, and Posco will raise its stake in Nippon Steel to 3.81 percent by March 31, they said.

Posco and Nippon Steel’s “alliance will continue in this part of the world to check bigger rivals like ArcelorMittal,” said Lee, the analyst at SK Securities.

China supplies one third of global steel, led by Baosteel, the biggest steel maker in the country. China overtook Japan as the largest buyer of iron ore in 2003, and Chinese mills set global benchmark iron-ore prices last year for the first time.

Originally published by Bloomberg News.

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